Instead of stressing about meeting the December 29 deadline for tax-deductible charitable donations this year, consider opening a Donor Advised Fund (DAF) account. The reasons are simple: a DAF is easy to establish, flexible, and private—and it can relieve you from the pressure of having to make too many individual giving decisions before year end.
Donor Advised Funds (DAFs) are charitable gift vehicles, sponsored by public charities that accept tax-deductible donations and invest them in a donor account until the donor requests that grants be made from the account to other IRS qualified charities. Once a donor gifts assets to the DAF, they no longer have legal control over those assets.
To start, you open a DAF Donor Account at an investment firm or commercial gift fund. Check with your Boston Private advisor to learn about the DAF solutions available to you. You then contribute cash, stocks, or other assets to your account at any time and receive a tax deduction for all the contributions you make to the DAF during each tax year.
While in the account, your money is invested in the pooled investment vehicles associated with the fund, so it has the potential to grow for the future. “Generally, there is a choice of investments, much like a 401(k) plan, and you may request that the gift be allocated to the various funds to suit your time frame and investment outlook,” explains Deirdre Hall, CFA, Managing Director, Boston Private Wealth.
Later, online or on the phone, you can make gifts (or “grants”) from the fund to any qualifying non-profit charity at your convenience, over an extended period of months or years. “With a DAF, one of the biggest benefits is that you have the flexibility to make gifts from your account to any IRS-approved public charity at any time,” Hall explains.
All transactions and required documentation for IRS reporting are handled by the fund sponsor and you receive tax-ready confirmations of your contributions, grants, and quarterly investment statements for the account. No capital gains are realized on securities donated to the DAF, provided that they have been held for more than one year.
If this sounds like an attractive giving solution, it is in many ways, especially when you’re busy with other priorities. Still, says Hall, it’s important to remember that:
There are fees involved for investment and account management.
Contributions to a DAF are considered irrevocable gifts, so you no longer have direct control over them.
Any investment gains in the fund won’t create additional tax benefits for the donor, although they can increase the amount of money available for granting gifts.
You can contribute cash (via checks or credit cards) or securities to your DAF account.
If you contribute securities, they are usually sold immediately and the amount available for grants becomes the liquidated value of the securities, which could be more or less than the tax value of your gift. But if you donate highly appreciated securities to fund a DAF, you’ll get two tax benefits at once because you can:
The ability to give (or “grant”) money at any time to the charities you select is an important benefit of DAFs because this removes the burden of having to complete individual gifts by a certain date. It also means you can be more strategic, and less impulsive, about your giving decisions.
“You don't have to decide which charities you'll be granting gifts to in any particular year,” says Hall. “Instead, you can make a single or multiple contributions to the DAF, remove those assets from your estate, and realize the tax benefits for that year. Then you can make individual donations later to any number of charities. There's no time-limit on when you must do this.”
For example, says Deirdre, “We recently worked with a donor who wanted to give 10% of the proceeds from the sale of her business to charity, but in the flurry of activity leading to the closing of the sale she didn’t have a chance to carefully select the charities and amounts she wanted to give. A DAF quickly took off the pressure.” Under current law, she could get an immediate tax deduction on her contribution in the year of the sale, but she now has plenty of time to plan her charitable giving strategy.
Two other recent examples of situations where Hall found DAFs to be a timely solution:
A married couple who didn’t have any heirs, and wanted the bulk of their estate to go to charity.
“In this case, we set up an amendment to their trust and a Letter of Transmittal that established the DAF and gave the trustee instructions about how to give grants to various charities after the donors’ deaths. Using a detailed spreadsheet, the couple specified the percentage that each charity should receive from the DAF through a grant every year, in perpetuity—or as long as the money lasts.”
An investor with two very concentrated, highly appreciated stock positions.
“This person had two large, concentrated stock positions in his portfolio with a very low basis that he had purchased many years ago. We had been working with him to sell off shares of the stock each year to rebalance and diversify his asset allocation. But that strategy meant realizing capital gains every year and paying taxes on them.
“Once we discovered he was ‘charitably inclined,’ the DAF became a very good option for him. He decided to open a DAF and fund it each year with a portion of the stock we were trying to remove from his portfolio. Each year he gets a tax write-off for his contribution and he doesn’t have to pay the capital gains tax on it. Although that money is not in his estate anymore, he was going to donate most of it to charity eventually anyway, so the DAF turned out to be an excellent solution.”
As Hall’s examples suggest, DAFs are quickly gaining a foothold in the world of charitable donations because of their easy set-up, ability to accept large contributions, tax benefits, and giving flexibility. “DAFs have become a practical charitable giving method for just about everyone,” she says.
They are also an excellent alternative to establishing a private foundation. “Unlike a charitable foundation—which usually involves hiring a lawyer; completing more paperwork, regular disclosures, and administrative duties; and incurring higher fees and costs—a DAF is a more private and less expensive way to go,” Hall says.
DAFs also have advantages over ad hoc giving when it comes to your family legacy. “Many families find DAFs to be wonderful vehicles for teaching children and grandchildren the joys, benefits, and responsibilities of philanthropy. And what better way to teach than to set up a family grant committee involving the children?” she adds. You might also consider giving your children a budget and helping them develop their own granting program. ”The possibilities are endless, but the transfer of values is priceless,” Hall concludes.
Donor Advised Funds are flexible charitable giving tools that donors have increasingly embraced in large numbers. Their simple implementation, ability to make grants over time, lack of paperwork, and ongoing tax advantages make them a perfect giving method for modern-day philanthropists and donors who want to make their charitable giving more streamlined, strategic, and personally rewarding.
The opinions expressed and information contained in this article are given in good faith, may be subject to change without notice, and are as of the date issued. The accuracy and completeness of this information is not guaranteed. Since each client’s situation is unique, please review your specific investment objectives, risk tolerance and liquidity needs with your advisor before a suitable investment strategy can be selected.
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